Stimulus spending may only add more debt
President Joe Biden’s top legislative priority goes by two names: “covid relief” and “stimulus.” The two terms help reporters and politicians avoid repetition, but they also point to the two main purposes the bill is supposed to serve.
It would, among other things, send $1,400 checks to most households. That can be defended as relief: It helps people who have been harmed by the economic fallout of the pandemic. It can also be defended as a stimulus: Recipients will spend some of the money, and their purchases will boost the economy.
Critics of the bill mostly say it would be too stimulative. The economy, they say, won’t need federal help as more and more of us get vaccinated, and a big stimulus bill will leave the nation with too much debt and too much inflation.
I don’t share the worry about inflation. Market indicators of expected inflation, adjusted for some measurement issues, currently suggest that it is going to run well below the Federal Reserve’s 2% target during the next five years.
My concern about spending federal money for the purpose of stimulus is different: I think it’s unlikely to have much stimulative effect. It will increase the federal debt without leaving the economy appreciably bigger than it would have been without the bill.
The case for fiscal stimulus relies heavily on models suggesting that when an economy is operating below its potential, government spending can close the gap. The models also suggest that too much spending can cause the economy to “overheat.”
Much of the debate has concerned how far we are from reaching the economy’s full potential, and which of these results is therefore more likely. But the models don’t take adequate account of how fiscal and monetary policy interact.
Consider one scenario: Congress, moved by Biden’s warning that previous stimulus measures have been too small, expands the bill from its current $1.9 trillion to $3 trillion and passes it. Expected annual inflation jumps, for the first time in decades, above 3%.
The cries that the Fed must act to stop overheating get louder. The Fed, which wanted inflation to rise but not this rapidly, responds by raising interest rates faster than it would have done without the huge stimulus bill and the spike in inflation expectations. Those expectations then drop back down.
In that case, the Fed would have undone at least a significant fraction of the stimulative effect of the bill. It would have counteracted the stimulus not out of a deliberate aim to subvert it, but out of a desire to keep inflation under control. If it overreacted, the Fed could more than completely counteract the stimulative effect of the bill: It could throw the economy into a recession it would not otherwise have entered.
Or consider another scenario: Congress passes a large stimulus bill, but expected inflation doesn’t rise much, because markets assume that the Fed would act to keep it in check. Household and business decisions about consumption and investment reflect the expectation that the economy isn’t going to get much hotter. Total spending levels don’t rise much, that is, in response to the bill.
In this case, too, the stimulative effect would be weak. The composition of the economy might be significantly affected: By spending money on certain things, Congress can direct resources toward some sectors of the economy and away from others. If Congress decided to spend all the money in North Dakota, the state would have a boom at the expense of other places. Federal debt projections would look more ominous. But the economy wouldn’t have expanded much overall.
Several conclusions follow from these thought experiments.
First, any stimulative effect of increased federal spending depends on how the central bank reacts to changing economic conditions and how businesses and households expect it to react.
Second, because of this, fiscal stimulus will have a smaller positive effect – possibly one quite a bit smaller, and possibly even a negative one.
Third, increased expectations for inflation and for total levels of spending in the economy would expand the economy even if accomplished through means other than a stimulus bill.
Taken together, these points don’t obliterate the case for the legislation before Congress. Spending money to speed the pace of vaccination will likely help the economy, just not via the route of putting dollars in people’s pockets.
But if fiscal stimulus leads to a significant degree of monetary offset, it shrinks the case for that legislation – and suggests that the legislation itself should shrink, too.
DEAR ABBY:
My granddaughter just informed me she has decided she would be happier living as a boy, and she has gone so far as to legally change her name. I want to be supportive, but I admit I’m having a lot of trouble accepting it, or at least figuring out how to deal with it.
She’s my only grandchild and most likely the only one I’ll ever have. I loved my granddaughter with all my heart, and I don’t know how to shift gears to a grandson. I keep stumbling when I try to use the new name. I would welcome any suggestions you could make, including information about support groups you might know of.
-- GRANDMA IN PAIN
DEAR GRANDMA:
Gender reassignment is not something that someone does on a lark. There are many steps involved, and the journey, while liberating, can be challenging both
physically and emotionally. I am sure this is something your grandchild has given much thought to.
Yes, coming to terms with it can be as much of a journey for family as it is for the transgender person, and it can take time and understanding on all sides. A group called PFLAG can help you through this. It has been mentioned in my column for decades. It has helped countless families to build bridges of understanding between themselves and their lesbian, gay and transgender loved ones. Please don’t wait to contact them. You will find PFLAG at pflag.org, and their phone number is (202) 467-8180.
DEAR ABBY:
I am a 50-year-old man. My whole life, my relationship with my father has been strained. When I was in my teens and 20s, when he bought presents for my two siblings and not for me, he would say things to me like, “I forgot I had you.”
In spite of this, I became very successful in life. I had a great career and am now retired. My father recently announced to me that he had made only two mistakes in his life -- marrying my mother, who has put up with him for more than 60 years, and having children.
My dilemma is, he is now 90 with many health problems. He is in the hospital now for a heart problem. I know he won’t last much longer. I feel nothing for him, and I am not sad. When he dies, I know I won’t care. Is this normal? I feel guilty for feeling this way. -- DON’T CARE IN TENNESSEE
DEAR DON’T CARE:
Please don’t feel guilty for feeling no regret at the prospect of “losing” a cruel and withholding parent who made it his business to make those around him feel “less than.” Do not be surprised if, rather than feel a sense of loss, you feel at peace, as though a weight has been lifted from your shoulders. You should not feel guilty for that, either. Comfort and emotionally support your mother as best you can when he dies, but don’t be shocked if she, too, feels some relief. Their union could not have been the happiest.
On Feb. 27 at 7 p.m., Blackstone River Theatre will present Jake Blount and The Vox Hunters in a streaming concert. Ticket price is $15 and an additional $3.81 charge is added on by the streaming platform. As a bonus, with a ticket purchase viewers can watch again or later at any time during an included 72-hour rebroadcast. Tickets can be purchased at: https://noonchorus. com/jake-blount-vox-hunters/
Blackstone River Theatre is excited to welcome back Rhode Island favorites The Vox Hunters, and also offer the BRT debut of Jake Blount, an award-winning banjoist and fiddler, and a 2020 recipient of the Steve Martin Banjo Prize. Blount specializes in the music of Black communities in the southeastern United States and interpolates blues, bluegrass and spirituals into the old-time string band tradition he belongs to. Blount has shared his music and research at the Smithsonian Institution, Yale University, and Berklee School of Music, and he has appeared on Radiolab, Soundcheck and NPR’s Weekend Edition. His first fulllength solo album, “Spider Tales,” debuted at #2 on the Billboard Bluegrass Chart and earned five out of five stars as The Guardian’s Folk Album of the Month.
Armand Aromin and Benedict Gagliardi – The Vox Hunters – are musically bound by a shared love of traditional Irish music, which originally brought them together, as well as an eclectic and ever-growing amalgam of songs both inside and far outside the realm of folk music. Combining Aromin’s multifaceted fiddle playing, Gagliardi’s self-developed concertina style, and a pair of complementary voices, The Vox
Hunters will present their exciting repertoire of driving dance tunes blended with an unorthodox collection of interesting songs. They are touted as strong tradition-bearers in their generation, and their genuine affinity for the music is evident in the emotion they draw from it. Last year they released their second album, “Fresh From The Board: Music From The Ocean State Songster, Vol. 1.”